Inflation, Is It Good or Bad?

 

We are seeing rises in inflation across many major economies. Inflation in the United States hit 5.4% in May, the highest in 13 years. (Source: WSJ) Back home in Singapore, CPI inflation rose 2.1% in April, higher than expected. (Source: ING)

Inflation has usually been seen as a bad thing; something that steals money from under our noses, like an invisible thief.

However, do you know that inflation can be a good thing too?

Just like a gun; inherently, it is neither good nor bad. It all depends on the intention of the user. Law enforcement officers use guns to maintain order. On the other hand, criminals use guns for undesirable activities.

Inflation is defined as a general increase in prices. This affects the goods and services that we buy and use on a day-to-day basis. The Consumer Price Index (or 'CPI') tracks a basket of goods and services and compares the changes in price with the previous month/year.

If you keep money in the bank, you're probably getting about 0.05% in interest yearly. At a 2.1% inflation rate, the "purchasing power" of your money will shrink at a rate of 2.05% yearly.

This means that if you have $50,000 in the bank today, it would only be worth about $33,041 in 20 years' time! (Well, your bank would say you have $50,502, but you would only be able to buy 2/3 of the goods compared to now.)

On the other hand, inflation also drives up the prices of our property, stocks, assets, and even our incomes.

For example, the S&P 500 index which tracks the top 500 US companies' shares has returned about 285% since 20 years ago. This is an average annual return of 14%!

So you can indeed make money with inflation, simply by being an investor instead of a depositor.

Would you prefer to be a victim or beneficiary of inflation?

Stop sitting on the wrong side of the fence! Invest your lazy money and let them work hard for you today.